1. Economics 330 Economics of Health Care
Dr. Greg Delemeester
Spring 2010

2. National Health Care Expenditures
Year
Total Spending
(in billions)
Percent change
Percent of GDP
Per capita spending
1950
$ 13 --
4.5
$ 82
1960 28
8.8
5.2
148
1970 75
10.5
7.2
356
1980
254
13.0
9.1
1,100
1990
714
10.9
12.3
2,814
2000
1,353
5.9
13.6
4,789
2005
1,982
7.9
15.7
6,701
2006
2,113
6.7
15.8
7,071
2007
2,240
5.6
15.9
7,423
2008
2,339
4.3
16.2
7,681
Source:

3. Why do Americans spend so much on medical care?
Aaron (1991)
Expansion of 3rd party payment system
Aging of the population
Expanded medical malpractice litigation
Increased use of medical technology
Other factors
Physician-induced demand
Entry restrictions
Predominance of not-for-profit providers

4. Personal Health Care Expenditures (in billions of dollars)
Private Spending
Public Spending
Year
Out of pocket
Private Insurance
Federal
State
1960
$ 12.9
$ 5.9
$ 2.0
$ 2.9
1970
24.9
14.0
14.4
7.8
1980
58.1
61.2
62.3
23.9
1990
136.1
204.7
172.8
63.5
2000
192.6
402.8
369.8
117.1
2005
247.5
599.8
562.3
176.9
2006
254.9
634.6
620.1
178.7
2007
270.3
665.0
661.3
188.7
2008
277.8
691.2
718.0
189.8
Source:

5. 2008 National Health Care Dollar…
…Where it Came From
…Where it Went

8. Changes in Hospital Usage

9. Changes in Medical Care Delivery
Shift from private to public financing
Shift to 3rd party financing
Changes in hospital usage and pricing
Deregulation and growth in managed care

10. Payment Structure Traditional fee structure Managed care
Fee for service
Retrospective payment
Incentive to overspend
Managed care
Capitation and risk sharing
Prospective payment
Incentive to limit care

11. Health Care As a Commodity
Demand is irregular
Asymmetric information problems
Widespread uncertainty
Reliance on not-for-profit providers
Insurance as the primary means of payment

12. Health System Goals Access to care Quality of care Cost of care
Who’s covered?
What’s covered?
Quality of care
Cost of care

13. Private Health Insurance Coverage (under age 65, numbered in millions)
With Health Insurance*
Without Health Insurance
Year
Number
Percent
1999
161.2
68.3
38.5
16.1
2000
160.8
67.1
41.4
17.0
2001
162.4
67.0
40.3
16.4
2002
159.4
65.3
41.7
16.8
2003
157.5
64.4
41.6
16.5
2004
159.5
64.0
42.1
16.6
2005
160.1
63.6
2006
155.8
61.5
43.9
2007
157.9
61.6
43.3
* Employer-based.
Source: Health, United States, 2008, Table 138 and 140.

14. Health System Goals Access to care Quality of care Cost of care
Who’s covered?
What’s covered?
Quality of care
Medical outcomes
Medical efficacy
Cost of care
Who pays?
How much? 14

15. Review of Economic Methodology

16. Economic Fundamentals
Optimization
Marginal Analysis
Supply and Demand
Equilibrium

17. What are the likely consequences of the following events in the U
What are the likely consequences of the following events in the U.S market for cosmetic surgery?
Health insurance coverage is expanded to cover all elective procedures, such as tummy tucks, nose jobs, and liposuction
The FDA (Food and Drug Administration) takes all silicone-based implants off the market fearing a connection with certain connective-tissue diseases
Personal finance companies start a nationwide lending program for cosmetic procedures not covered by health insurance
Medical malpractice insurance premiums increase for plastic surgeons
Medical schools announce that residents in plastic surgery can be licensed after only five years instead of the current seven years

18. Economic Fundamentals
Optimization
Marginal Analysis
Supply and Demand
Equilibrium
Elasticity
Welfare analysis
Effects of government intervention

19. Suppose the market for lasik eye surgery can be described by the following equations: Qd = 5100 – 6P Qs = P
Solve for the market equilibrium price and quantity.
Calculate consumer and producer surplus.
Calculate the elasticity of demand at the equilibrium.
Suppose the government imposes an excise tax of $100 per surgery on eye surgeons. What is the new equilibrium price and quantity? What happens to social welfare?

20. Competitive Market Model
Many buyers/sellers
Homogeneous product
No entry barriers
Perfect information $ MC
ATC
Profit max rule: P = MC
AVC P1
MR1
LR Equil: π = 0 q1
quantity

21. Market Failures Market Power Externalities Public goods Monopoly
Restricted entry (AMA, CON)
EOS
Monopsony
Externalities
Communicable diseases/immunizations
Uninsured and cost shifting
Public goods
Free-riders
R&D

22. Imperfections in Medical Markets
Imperfect/Asymmetric information
Agency problem (induced demand)
Adverse selection
Moral hazard
Third-party payers
Hospitals: 3¢ per $1
Physicians: 20¢ per $1

23. Dealing with Market Failure
Collective provision
Medicare
Medicaid
Government regulation
Price controls
Entry restrictions
FDA
Tax Policy
Tax exemptions
Government Failure?

24. Economic Evaluation in Health Care

25. The Inevitability of Trade-Offs
The value of a medical intervention
The inclusion of a drug on the formulary
Paying for an experimental procedure
Investing in new technology
Is it worth it? How do we measure value to insure we get value for spending?

26. Options for colorectal cancer screening
Fecal blood test
($20)
Sigmoidoscopy
($150 - $300)
Barium enema
($ $500)
Virtual Colonoscopy
($500 - $900)
Colonoscopy
($800 - $1200)
Is it worth the extra money?

27. Types of Economic Evaluation
Cost of illness studies
Cost-benefit analyses
Cost-effectiveness studies

28. Cost of Illness Studies
What does it cost?
Burden of 5 chronic conditions in US (Druss et al., 2001)
Mood disorders, diabetes, heart disease, asthma, and hypertension
Direct cost of treatment: $62 billion
Cost of treating coexisting conditions: $208 billion
Lost productivity: $36 billion
Role in analysis – increased awareness
$306 billion

29. Cost-Benefit Analysis
Benefits
today
time
Costs
Net PV =
The higher the discount rate, r, the lower the PV

30. Cost-Benefit Criterion
If net benefit stream is positive, project is acceptable
If ratio is greater than one, project is acceptable
Examples
Clarke (1998): mobile mammographic screening and travel cost method
Ginsberg and Lev (1997): riluzole and ALS

31. Challenges of Cost-Benefit Analysis
Valuing benefits
How do you place a value on a human life?
Willingness-to-pay approach
wealth
life expectancy
current health status
possibility of substituting current consumption for future consumption
Choosing a discount rate

32. Cost-Effectiveness Analysis
Measures health benefit by health outcome, not the dollar value of life
Using the decision makers’ approach
Maximize the level of health for a given population subject to a budget constraint
Practical guide for choosing between programs or treatment options when budgets are limited

33. Cervical Cancer Screening
The medical evidence is clear: Cervical cancer screening saves lives. Much of the focus of cost-effectiveness research addresses issues concerning the appropriate screening interval.
D.M. Eddy (Screening for cervical cancer, Annals of Internal Medicine 113, , 1990) studied the issue and estimated that annual screening for a hypothetical cohort of 1, year-old women screened until age 75 would cost $1,093,000 and would save 27.6 life years. If screened every three years instead, the cost would be $467,000 and 26.8 life years would be saved.
Is annual screening cost effective?

34. Incremental Cost-Effectiveness Ratio
If CA > CB and EA < EB, B dominates.
If CA < CB and EA > EB, A dominates.
If, however, CB > CA and EB > EA, choice is not obvious. Use CE.

35. ICER Curve: 2 Treatments
Effectiveness
Large ICER = flat slope B EB A EA
Cost CA CB

36. Cervical Cancer Screening: Redux
D.M. Eddy (Screening for cervical cancer, Annals of Internal Medicine 113, , 1990) studied the issue and estimated that annual screening for a hypothetical cohort of 1, year-old women screened until age 75 would cost $1,093,000 and would save 27.6 life years. If screened every three years instead, the cost would be $467,000 and 26.8 life years would be saved.
What is the ICER?

37. ICER Curve: Multiple Treatments
Effectiveness
“flat of the curve” G F D E B C A
Treatments C and E are dominated
Cost

38. Measuring Costs Direct – associated with use of resources
Medical
Non-medical
Indirect – related to lost productivity
Intangible – associated with pain and suffering, grief, anxiety, and disfigurement

39. Measuring Effectiveness
Improvements in Health
Surrogate measures stated in terms of clinical efficacy
Blood pressure, cholesterol levels, bone mass density, or tumor size
Intermediate measures stated in terms of clinical effectiveness
Events (heart attack, stroke, cancer), scores on exams
Final outcomes measure economic effectiveness
Events avoided, disease-free days, life-years saved, quality-adjusted life years saved

40. Survival Measures Problem Set 1: #16
Improved Life Expectancy Due to Clinical Treatment
Life expectancy = area under survival function
Survival
probability
LE w/o treatment = ½( ) = 3.25 yrs A
100%
Gain in LE during trial = ½( )1.5 = yrs
Gain in LE after trial = ½( ) = yrs B
90%
Total Gain in LE = yrs
77% C
Survival function for treatment group
Survival function for control group D
Time (years)
1.5
6.5

41. Quality of Life Measures: QALY
Quality-Adjusted Life Year
Measured on a preference scale anchored by death (0) and perfect health (1)

42. Calculating a QALY x = healthy years t = chronic health years Utility
Normal 55-yr old male has LE of 25 more yrs
Diabetic 55-yr old male has LE of 15 more yrs
U(H1)
x = healthy years
t = chronic health years
U(HD) 6 15
Time (years)
Value of one year in chronic health state is x/t
Utility value of 15 years = 6/15 = 0.40
QALY of remaining 15 years = (.40)(15) = 6 years

43. Decision Trees Handout Treatment A Treatment B 2% 5% 20 years 10 years
Mortality Rate 2% 5%
Life Expectancy for Survivors
20 years
10 years
Initial Treatment Cost
$10,000
$3,000
Follow up cost, year 1
$5,000
$1,000
Annual follow up costs, all subsequent years
$500